CMS Proposed Rules Provide Framework for Organizing Accountable Care Organizations

May 12, 2011

On March 31, 2011, the Centers for Medicare and Medicaid Services (“CMS”) announced proposed rules and guidance (the “Rules”) regarding the development and implementation of Accountable Care Organizations (“ACOs”).  Part of the Affordable Care Act ( the Act’), these new Federal regulations proposed March 31, 2011, implement the Medicare Shared Savings Program (the Program) established under section 1899 of the Social Security Act.  The three main goals of the Program are: (1) better care for individuals; (2) better health outcomes; and (3) lower growth in health care expenditures.  Under the Program, groups of providers and suppliers, meeting specific criteria, manage and coordinate the care for Medicare fee-for-service (“FFS”) beneficiaries enrolled in Medicare Parts A and B (and not in the MA plan or PACE program).

An ACO is a legal entity recognized by applicable State law, as identified by a Taxpayer Identification Number (“TIN”), comprised of eligible ACO participants that work together to manage and coordinate care for Medicare FFS beneficiaries, and that have established a mechanism for shared governance providing all ACO participants (with an appropriate proportional control of the ACO’s decision making process).   ACOs able to meet the quality standards will be eligible to receive payments for shared savings, and under the second model described below,  may also be required to share in any losses.

The Shared Savings Program is designed to promote collaboration, coordination and accountability of providers, to encourage providers to make investments in infrastructure, to redesign healthcare processes, and to develop a more integrated delivery system with better outcomes regarding quality and efficiency.  Healthcare providers that are successful in establishing ACO programs and in meeting quality and efficiency standards will be able to share in savings achieved under the new Shared Savings Program in addition to their normal FFS reimbursement.

The new ACO Rules provide considerable flexibility for ACO participants to form ACOs in order to share in the potential savings.  Successful development of ACOs will require eligible participants to deal with a wide range of issues critical to the development of ACOs, including navigating complex rules related to eligibility, governance, leadership, quality, monitoring and reporting, achieving quality standards within a short period under the three-year agreement, responding to changes in the signed beneficiaries, achieving savings compared to the FFS benchmark, developing internal processes to carefully track performance on quality and financial measures, and creatively dealing with antitrust, Stark and other compliance issues, in order to achieve success.

It should be recognized that the formation of ACOs will entail significant investments of capital and other resources while subjecting ACO programs to uncertainties as to the risk-reward ratio for such investments.  CMS, by implementing the Shared Savings Program, seeks to reinvent the healthcare delivery system by moving the system away from volume-based purchasing to value–based purchasing, bending the cost curve and slowing the rapid growth in health care expenditures while maintaining quality. 

I.  Overview

1. Minimum Number of Medicare Fee for Service Beneficiaries to form an ACO: 5,000.

2. Method of Assigning Beneficiaries: Retroactively based upon the primary care physician.

3. Length of Agreement: 3 Years.

4. Control of ACO: At least 75% of the ACO must be owned by ACO participants, and all owners must have proportionate representation on the Board. Beneficiaries must be represented in the governance.

5. Options for Shared Savings:

6. Performance Standards: In order to receive shared savings, ACOs must meet 65 separate quality and performance measures.

7. Notice to Patients: ACOs must provide information to patients regarding the Shared Savings Program and allow patients to opt-out of information sharing.  Additionally, marketing materials must be approved by CMS.

II.  Eligibility and Governance

1. Eligible Entities.

ACO Participants. The Act and the rule establish five groups of “ACO participants” that may form an ACO:

Providers/Suppliers.  The following organizations may participate in (but not independently form) an ACO:

2. Legal Structure.

Requirements for an ACO. The following are required for a properly formed ACO:

Special Rules for Hospitals.

3. Governance. CMS envisions a mechanism that is transparent, accountable to the beneficiaries and ACO participants, and that provides adequate authority to govern the quality, efficiency and patient-centeredness of health care services provided by the ACO.  Certain preexisting, self-contained ACOs will not have to form a separate governing body. 

CMS proposes the following requirements for provider-driven and patient-centered governance:

Comments. Comments are being solicited as to whether the 75% control threshold is appropriate, whether appropriate representatives must be employed by and representing Medicare enrolled TINs, whether CMS should implement a requirement that ACOs describe how they will partner with community stakeholders, and on the  requirement that ACOs provide for beneficiary involvement in a governing processes.

4. Leadership and Management Structure. ACOs must demonstrate organizational commitment to the Shared Services Program, to the three-part aim of the ACO program, and to the terms and conditions of the three-year ACO agreement. 

ACOs must demonstrate a leadership and management structure that includes appropriate clinical and administrative systems that meet certain criteria:

5. Sufficient Number of Primary Care Providers and Beneficiaries. In order to maintain sufficient capacity to provide primary care services as well as realize sufficient share services, each ACO will be required to have at least 5,000 beneficiaries. Each ACO must also include sufficient primary care ACO professionals for the number of Medicare FFS beneficiaries assigned to it (which will be presumed if there is a minimum of 5,000 beneficiaries since they are assigned based upon primary care physicians).

CMS will issue a warning and possibly terminate a participation agreement if an ACO fails to meet the criteria of 5,000 beneficiaries.

ACO applicants must provide a list of national provider identifiers (NPIs) associated with the ACO providers and suppliers. This information is to be maintained, updated annually and reported to CMS.

6. Processes to Promote Evidence-Based Medicine, Patient Engagement, Reporting, and Coordination of Care. ACO participants will have to demonstrate sufficient mechanisms to promote higher quality of care, enhance coordination of care and other processes necessary to meet the needs and concerns of patients and their families, including effectively engaging patients and their families in medical decision-making.

ACOs will be required to define processes to promote evidence-based medicine, patient engagement, quality and cost measure reporting, and other technologies service.  CMS is proposing to allow ACOs considerable flexibility in providing documentation to meet these requirements with the expectation that over time, once these different processes are evaluated based upon actual experience, CMS will provide more specific requirements in order to promote successful outcomes.

ACOs must demonstrate to the Secretary that they meet the patient-centeredness criteria, examples include the use of patient and caregiver assessments or the use of individualized care plans.

ACOs must also have mechanisms in place to assess the health needs of the population and specific high-risk individuals.

ACOs must include the patient, the patient’s family,  and caregivers in the process, and incorporate values of transparency, individualization, recognition, respect, dignity and choice in all matters related a patient’s circumstances and relationships in health care. 

ACOs must include beneficiary representation on the ACO governing board.

7. ACO Marketing Guidelines. All ACO marketing materials, communications and activities related its participation in the Program such as mailings, telephone calls or community events that are used to educate, solicit, notify or contact Medicare beneficiaries or provider/suppliers regarding the ACO must be approved by CMS in advance to ensure that the materials are not confusing or misleading.

Billing claims, educational materials and other efforts that are not related to soliciting ACO participation will not have to be approved.

8. Program Integrity Requirement  & Compliance Plan. CMS is proposing specific program integrity criteria in order to protect the Program from fraud and abuse. Program integrity issues are a basis for termination of participation agreements.

Compliance Program. Each ACO must have a compliance plan that addresses how the ACO will comply with applicable legal requirements. Compliance plans must include the following minimum elements:

9. Certification. ACOs are also responsible for complying with all terms and conditions of the three-year agreement. Therefore, the accuracy of the application, all information and requests for payments submitted to CMS must be certified.

10. Conflicts of Interest Policy. Each ACO must have a conflicts of interest policy that applies to each member of the governing body to ensure that members of the governing body act in the best interest of the ACO and the Medicare program.  Components of an effective conflict policy include disclosure of relevant financial interests, procedures to determine whether conflicts of interest exist, and remedial action for members that fail to comply with the policy. 

11. Prohibition on Certain Required Referrals and Cost Shifting. CMS proposes to prohibit ACOs and their participants from conditioning participation in the ACO based upon referrals of federal health care services that the ACO or ACO participants knew or should have known is currently being provided to beneficiaries not assigned to the ACO.

III.  The Three-Year Agreement

1. Annual Application.  ACO applications will be approved with a currently proposed annual program start date of January 1, 2012.  Performance year will be based on the calendar year. Due to the short time frame for implementing the Shared Saving Program during the first year of the program, CMS is looking for comments on extending the start date to begin July 1, 2012, with an 18 month start and thereafter program years to coincide with the calendar year.

2. Timing and Process for Evaluating Shared Savings.  CMS proposes using a 6-month claims run-out period to calculate shared savings payments. A run-out period is the time between when a Medicare-covered service has been furnished to a beneficiary and when final payment is actually issued for the respective service.

3. Changes in the Program During the Three-Year Agreement. ACOs will be subject to future changes in regulation.

The only exception is that the following basic terms of the three-year agreement may not be changed:

ACO participants will be subject to all requirements applicable to FFS Medicare.

When regulatory modifications change processes associated with an ACO’s design, delivery, and quality of care, the ACO will be required to submit for review an explanation of how they will address key changes in the processes resulting from these modifications.  Failure to effectuate changes will cause an ACO to be placed on a corrective action plan and can lead to termination from the program.

3. Changes to an  ACO during the Agreement Period.

An ACO may not add ACO participants during the course of a 3-year agreement.

An ACO may remove ACO participants or add/subtract ACO providers/suppliers. 

An ACO will be required to notify CMS in order to have any new structure approved whenever significant changes occur. CMS will evaluate the structure and may require the ACO terminate its agreement or start the three-year period over.

4. Participation of Previously Terminated Program Participants. An ACO must disclose to CMS whether the ACO, its participants, or its ACO providers/suppliers have participated in the program under the same or different name, and specify whether it was terminated or withdrew voluntarily from the program. If previously terminated, the proposed ACO must list safeguards to allow participation for the full 3-year period.

ACOs may not begin another 3-year agreement period until the original agreement period has lapsed.

An ACO may not reapply to participate in the Program if it previously experienced a net loss during its first 3-year agreement period.

IV. Data Sharing During the Three-Year Agreement

1. Data Sharing.  CMS expects that ACOs are able to, or are working towards, independently identifying and producing the data necessary to evaluate beneficiaries, improved outcomes, quality, and improve efficiencies. CMS realizes ACOs will need data on beneficiaries assigned to the ACO and other data, and proposes to allow the ACOs to request additional information on potentially assigned beneficiary population in order to assess the services received by FFS beneficiaries both within and outside the ACO.

2. Sharing Aggregate Data. CMS will provide aggregate data on the assigned beneficiary population such as aggregate metrics (ex. Subpopulation numbers, ER visits, quality performance scores, etc.) and utilization information at the start of the agreement period based on historical data. This information will also be shared in conjunction with the yearly financial and quality performance reports.

3. Identification of Historically Assigned Beneficiaries. The name, date of birth, sex, and Health Insurance Claim Number (HICN) of each individual in the historically assigned beneficiary population available to an ACO at the beginning of the first performance year.  This information is provided in order for an ACO to identify processes that need change and identify individuals who would benefit from improved care coordination.

4. Sharing Beneficiary Identifiable Claims Data. CMS feels that more complete beneficiary-identifiable information is necessary for ACOs to better coordinate and target care strategies towards individual beneficiaries. Therefore, ACOs can request beneficiary identifiable claims data on a monthly basis in the form of a standardized data set about the beneficiaries currently being served by the ACO.

Information will only be available for those beneficiaries who received services during the performance year and who have not opted out of information sharing.

Because of legal restrictions, information on substance abuse patients will not be included in beneficiary identifiable claims.

ACO will have to explain how it intends on using the information in the initial application or in a formal request later, and sign a Data Use Agreement (DUA) which prohibits sharing the provided information outside of the ACO or in violation of HIPAA.

A DUA will be a condition of participation in the Program for any ACO requesting information and noncompliance could lead to termination from the program.

5. Opt-Out Notification & Provision of Information. ACOs must provide beneficiaries educational and other information about the Program and the option to opt-out of sharing information before most information is shared.

No advanced notice will be required to share: name, date of birth, sex, and HICN.

If a beneficiary objects, he or she should be given a form explaining how to opt-out. A list of opt-out HICNs will be kept by a CMS contractor.

The decision to opt-out will not impact the use of beneficiaries’ data or assignment to the ACO for purposes of determining such calculations as ACO benchmarks, per capita costs, quality performance, or performance year per capita expenditures.

V.  Assignment for Medicare Fee-For-Service Beneficiaries

1. Prospective versus Retrospective Beneficiary Assignment to Calculate Eligibility for Shared Savings.  Each ACO shall be eligible for shared savings for each year of an agreement period the ACO has an assigned population of beneficiaries.  Each year for which such determinations must be made is referred to as a performance year.  The Secretary has proposed a combined approach of retrospective beneficiary assignment for purposes of determining eligibility for shared savings balanced by the provision of aggregate beneficiary level data for the assigned population year.  The ultimate evaluation of the ACO and the physicians’ effectiveness will be based on the actual population they served during the performance year.

2. Majority versus Plurality Rule for Beneficiary Assignment.  The proposed rule is proposing to assign beneficiaries for purposes of the Program to an ACO if they receive a plurality of their primary care services from primary care physicians within that ACO. 

VI.  Calculating Quality Performance and Reporting Requirements

1. Assessing the Quality of Care Furnished by an ACO. The Social Security Act requires HHS to provide measures to evaluate the quality of care, including clinical processes and outcomes, patient/caregiver experiences, and utilization, furnished by the ACOs.  ACOs are required to monitor, report, and submit the data requested to perform evaluations. ACOs that do not meet the quality performance thresholds set by HHS will not be eligible for shared savings.

2. 65 Measures. For calculation of the ACO quality performance standards, CMS proposes 65 measures.  These measures are meant to identify success in the delivery of high-quality health care at the individual and population levels.  Providers will be scored on their overall achievement relative to national or other appropriate benchmarks. Value-based payment systems and public reporting will rely on these measures.  Furthermore, many of these measures align with other Medicare incentive programs.  These measures will be modified over time through additional rulemaking.

The measures are divided into five domains:

3. Requirements for Shared Savings.

The first year of the program will have differing requirements for shared savings:

Failure to Meet Performance Standards:

4. Data Required to be Submitted by ACOs. Data will be collected through three primary methods:

Claims data;

Survey Instruments; and

The Group Practice Reporting Option (GPRO) data collection tool.

5. Calculating the Quality Performance Standards. To calculate the Quality Performance Standard, CMS is considering two alternatives. These alternatives include:

Option 1: Performance Scoring Approach.

Option 2: A Minimum Quality Threshold. 

CMS has proposed to adopt Option 1.  CMS recognizes there are drawbacks to both approaches and seeks comments on these approaches and even a possible blended approach. 

6. Physician Reporting. The Affordable Care Act gives the Secretary authority to incorporate reporting requirements and incentive payments from other Medicare incentive payments options and reporting programs into the Program, expressly including incentive payments related to the Physician Quality Reporting Initiative (“PQRI”). CMS also intends to incorporate these reporting requirements for all “eligible professionals” (ex. physicians, nurse practitioners, physical therapists) within an ACO into the GPRO.

Eligible professionals with an ACO that satisfactorily submit data on the measures during the reporting year period (January 1 – December 31) would qualify under the Program for a Physician Quality Reporting System (PQRS) incentive equal to 0.5 percent of the ACO’s eligible professionals’ total estimated Medicare Part B PFS allowed for professional services furnished.

ACO participant providers/suppliers who meet the quality performance standards but do not generate shareable savings would still be eligible for PQRS incentive payments.

CMS considered incorporating Electronic Health Records Incentive Program requirements into the Program, however, it did not believe that the Program was ready for incorporation at this time.

7. Public Reporting. CMS believes that certain information should be made available to public and in particular organizations and consumers to facilitate more informed patient choice, the healthcare industry can offer incentives, and feedback to help improve the quality and lower the cost of healthcare.

ACOs should make information on the following information available to the public:

A list of providers and suppliers participating in the ACO;

VII.  Shared Savings Determination

1. Overview. Under the Affordable Care Act, ACO participants will continue to receive payment under the original Medicare Fee-for-Service program (“FFS”) for Parts A and B in the same manner that they would otherwise if they did not participate in the ACO program.  In addition to the FFS payments, ACO participants will be entitled to receive additional payments for shared Medicare savings provided that the ACO: (1) meets quality performance standards established by the Secretary; and (2) achieves sufficient costs savings as compared to a benchmark of expected average per capita Medicare FFS expenditures. 

2. Savings Tracks. CMS considered two methods for providing shared savings: a one-sided share savings only (Track 1) and a two-sided shared savings and losses (Track 2). CMS proposes a hybrid option of allowing participants to elect either Track 1 or 2.  Once an ACO selects a Track, ACO participants are not allowed to switch tracks midstream, except for the normal Track 1, Year 3 transition rules. 

CMS also proposes modified calculations to provide incentives for ACOs to include FQHCs, RHCs, and eligible CAHs.

3. Establishing the Benchmark. A benchmark shall be established for each ACO participant taking into account payments made for services to Medicare beneficiaries assigned to the ACO for three previous years under Medicare parts A and B. Benchmarks will be established for each three-year ACO agreement period using the most recently available data for beneficiaries assigned to the ACO.  The actual experience of each ACO will be used to develop a benchmark specific to the ACO in order to determine if performance under the ACO program has resulted in a sufficient amount of savings as compared to the benchmark to justify participation in shared savings (and/or shared losses for Track 2 participants). 

4. Benchmark Adjustments.

Adjustments to the Benchmark data will account for:

Other Discussed Adjustments:

5. Final Benchmark/Weighted Average.  Once the above adjustments are made, the data is to be trended to benchmark year three based upon national Medicare expenditure data, and the adjusted data for each of three years in the benchmark will then be averaged based upon a 10% weight for year one, 30% weight for year two and a 60% weight for year three to arrive at a weighted average to establish the benchmark. Once the weighted and adjusted benchmark is obtained, it will then be updated for inflation annually to the beginning of each year under the ACO program based upon annual increases in Medicare FFS part A and B expenditures. 

6. Beneficiary Notifications. CMS is proposing additional monitoring procedures and beneficiary notification requirements in order to avoid ACOs from avoiding service to at-risk beneficiaries to minimize losses against their benchmarks for ACOs under Track

7. Withholding of Performance Payments.  CMS is proposing a 25% withholding per year of performance payments in order to provide for appropriate assurance that ACO participants will be financially able to pay back any shared losses in outgoing years under the Program.

8. Summary of Differences Between Track 1 and 2.

Design Element

Track 1: One-Sided Model (performance years 1 & 2)

Track 2: Two-Sided Model

Maximum Sharing


52.5 percent

65 percent

Quality Scoring

Sharing rate up to 50 percent based on quality performance.

Sharing rate up to 60 percent based on quality performance


Participation Incentives

Up to 2.5 percentage points

Up to 5 percentage points

Minimum Savings


Varies by population

Flat 2 percent regardless of size.

Minimum Loss Rate


Flat 2 percent regardless of size

Maximum Sharing


Payment capped at 7.5 percent of

ACO’s benchmark

Payments capped at 10 percent of ACO’s benchmark

Shared Savings

Savings shared once MSR is exceeded; unless exempted, share in savings net of a 2 percent threshold; up to 52.5 percent of net savings up to cap.

Savings shared once MSR is exceeded; up to 65 percent of gross savings up to cap.

Shared Losses


First dollar shared losses once the minimum loss rate is exceeded.  Cap on the amount of losses to be shared phased in over three years starting at 5 percent in year 1; 7.5 percent in year 2; and 10 percent in year 3.  Losses in excess of the annual cap would not be shared.  Actual amount of shared losses would be based on final sharing rate that reflects ACO quality performance and any additional incentives for including FQHCs and/or RHCs using the following methodology (1 minus final sharing rate).

VIII.  Monitoring & Termination of ACOs.

1. Monitoring ACOs. CMS will monitor ACOs through analysis of financial and quality data, including aggregated and quarterly reports, site visits, compliant investigation, and audits.

Record Retention. ACOs, ACO participants, ACO providers/supplier and contracted entities performing services and functions for an ACO are required to maintain and provide access to DHHS and its designees all books, records, data related to Medicare utilization and costs, contracts, quality performance measures, shared savings distributions and other financial records for a period of 10 years after the end of an agreement period or after an audit, examination or inspection, whichever is later.  With notice to the ACO at least 30 days prior to the end of that period, the retention period may be extended.  Termination of the ACO or fraud by the ACO may result in an automatic 6 year extension of the record keeping period. 

2. Termination of ACOs. An Agreement with an ACO may be terminated before the end of the three-year agreement period if the ACO violates any of the requirements of the program or its agreement.

An ACO may voluntarily terminate, but must provide sixty day advance notice if it desires to voluntarily terminate its participation.

In the event an ACO successfully completes its three-year agreement, CMS will refund any shared savings that was withheld. If, however, the ACO’s three-year agreement is terminated before the completion of the three-year period, CMS will retain any portion of the shared savings withheld. 

A terminated ACO may reapply to participate at the end of the original three-year period, but must demonstrate it has corrected the deficiencies that caused the termination.

An ACO with minor deficiencies that do not present harm to beneficiaries or a negative impact on care may avoid termination by submitting a Corrective Action Plan (CAP).

3. Reconsideration Review Process

By statute, no administration or judicial review is available with respect to:

In other circumstances, the following process will apply:

ACO may request an additional review by CMS of the Recommended Decision. This review is based only on the evidence submitted for the initial reconsideration review.  After this review, CMS issues a "Final Agency Determination."

This review process does not apply to anti-trust determinations by an anti-trust agency.

IX.  Coordination with Other Agencies

1. Other Agency Guidance.  In order to facilitate participation in the Program and to ensure coordinated agency effort, the following three documents will be released with which participants are strongly encouraged to become familiar:

Waivers of CMP, Anti-Kickback, and Physician Self-Referral Laws. A joint CMS and DHHS Office of Inspector General (OIG) Medicare Program; Waiver Designs in Connection with the Medicare Shared Savings Program and the Innovation Center addressing proposed waivers of the civil monetary penalties (CMP) law, Federal anti-kickback statute, and the physician self-referral law;

IRS Guidance Relating to Tax Exempt Organizations. An Internal Revenue Service (IRS) notice soliciting comments regarding the need for additional tax guidance for tax-exempt organizations, including tax-exempt hospitals, participating in the Program; and

Antitrust Policy Statement. A proposed Antitrust Policy Statement issued by the FTC and DOJ (collectively, the Antitrust Agencies), this publication provides safety zones for ACOs comprised of several organizations and methods for calculating shares of common services.

2. Prohibition Against Program Participation by ACOs with Market Power. In light of the Antitrust Agency Policy Statement, CMS proposes to the following:

Antitrust Letter.  CMS will require that, except for an ACO that qualifies for the rural exception articulated in the Policy Statement, an ACO with a Primary Service Area (PSA) share above 50 percent for any common service that two or more ACO participants provide to patients from the same PSA must submit, as part of its Program application, a letter from the reviewing Antitrust Agency confirming that it has no present intent to challenge or recommend challenging, the proposed ACO.  Absent such a letter, the proposed ACO will not be eligible to participate in the Program. ACOs with PSA Share between 30 and 50 percent may request an expedited review and letter from the Antitrust Agency.

Notification of Material Change. Where there is a material change, in the participant and/or provider/supplier composition of an ACO, CMS has proposed that the ACO must notify it of the change within 30 days and that the ACO must recalculate and report at that time their PSA shares for common services that two or more independent ACO participants provide to patients from the same PSA, and the ACO may be subject to mandatory review or re-review by the Antitrust Agencies in order to maintain the benefits of competition for Medicare beneficiaries and eligibility to participate in the Program.

Reasons for Limitation on Market Power.

X.  Overlap with Other CMS Shared Savings Initiatives

1. General Rule: Prohibition against Participating in Multiple Medicare Shared Savings Programs.  Out of a concern of providers being rewarded twice for care provided to the same beneficiary, providers are prohibited from being an ACO participant in the Program if that provider is participating in other Medicare shared savings programs. A list of programs will be maintained on the CMS website.

Current prohibited programs include: 

2. ACOs May Participate in Non-Medicare Programs. Similar shared savings programs that do not apply to Medicare are not prohibited.  Such programs include initiatives to provide medical homes for Medicaid enrollees under Section 2703 of the Affordable Care Act or any program to establish community health teams to support medical homes under Section 3502 of the Affordable Care Act.

3. Individual Provider Exception. CMS does not believe individual providers should be excluded from participating in multiple Medicare shared savings programs.  Accordingly, an ACO provider who submits claims under multiple Medicare-enrolled TINs may participate in multiple shared savings programs if the patient population is unique to each program and none of the relevant Medicare-enrolled TINs participate in both programs.

Comments. Comments to the new ACO Rules are solicited by CMS on or before June 6, 2011.  The current implementation deadline for entry into the ACO program and the three-year agreement with CMS is January 1, 2012.  Based upon the complexity of the ACO Rules and several yet unanswered questions, there may be a delay in the implantation of the Shared Savings Program until July 1, 2012.